Shanghai Australian share and bond markets could benefit from a rush of Chinese money after the central bank announced on Monday that capital controls would be lifted in the Shanghai Free Trade Zone.

Chinese companies and people with an account in the new zone will be allowed to directly invest overseas without the need for pre-approvals or a cap on the total amount of money, according to the guidelines published by the People’s Bank of China (PBoC).

It is not just residents in the 29-square-kilometre zone who will benefit from the dramatic relaxation of restrictions: non-residents can also set up so-called free-trade accounts.

The PBoC also said foreign companies, with operations in the zone, could issue yuan-denominated bonds in the onshore market – a move that would open up the world’s largest untapped pool of savings. And the central bank plans to remove interest-rate and exchange-rate controls within the zone, although at a more gradual pace, once “conditions are ripe".

“It’s more aggressive than we thought," said ANZ chief China economist Liu Li-Gang. “The free-trade zone is not subject to any capital controls and they are also allowing non-residents to set up accounts."

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Still, there is some uncertainty about how Chinese companies and people will be able to transfer the initial funds for investment. The flow of money between normal Chinese bank accounts and the new free-trade accounts (FTAs) will still be subject to regulations. Mr Liu said a lot would depend on how the China Banking ­Regulatory Commission treats those initial transfers.

“This could be very exciting," he said. “But a lot will depend on the specific banking regulations."

Space race blasts off

While China is moving to open up its financial sector, Beijing is also using its economic muscle to re-open the space race with the United States.

On Sunday its Long March blasted off, carrying a robotic rover that will touch down on the moon in two weeks time. It will be the first soft landing on the moon since 1976.

China has been talking about lifting its capital controls for at least a decade but a fear of large outflows has tempered any government action.

The country has more than a million millionaires, who are subject to strict investment controls. As it stands, individuals are restricted to exchanging the equivalent of just $US50,000 ($54,900) in foreign currency a year.

There are ways to get around the rules, including by setting up trading ­companies, using the casinos in Macau or even taking large suitcases of cash to Hong Kong. However, a legitimate channel for investment funds could potentially see significant amounts of money make their way to Australian markets.

People’s Bank wants a ‘mini Hong Kong’

Australian companies would also benefit from the PBoC’s move to allow foreign firms to issue yuan-denominated bonds in the onshore market, allowing them to diversify their fund-raising activities. China’s $US3500 billion bond market is the biggest in Asia, outside Japan, but it’s dominated by the government and state-owned companies. The corporate bond market is relatively undeveloped.

In the two months since it was launched more than 1400 companies have registered in the new zone on the outskirts of Shanghai, which the government has proposed as a testing ground for financial reforms.

Another 6000 are in the process of applying, according to its administrative committee. So far,
ANZ Banking Group
is the only major Australian company to announce its involvement.

The bank said last month it had received approvals to set up a sub-branch in the new zone next year.

It follows other banks such as Deutsche Bank, Citibank, DBS, Hang Seng Bank, HSBC and Bank of East Asia, which have all been approved to start operations there.

Zhu Haibin, the China economist at JPMorgan, said the new rules announced by the PBoC were part of an effort to establish a “mini Hong Kong" in Shanghai. “There will be almost no restrictions in overseas investing," he said. “This will see investors treated similar to those in Hong Kong."

Hong Kong and Singapore, with their low taxes, open ports and light-touch regulation, are the dominant financial centres in Asia. By contrast the Chinese financial sector remains underdeveloped due to the tight capital and regulatory restrictions imposed by Beijing.

Mr Zhu said the loosening of regulatory and licensing restrictions within the Shanghai Free Trade Zone was likely to progress much faster than had been expected. But he believed so called “big-bang" reforms like liberalising interest rates and free-trading of the yuan would be more gradual, as they needed to be replicated at the same time in other parts of the country.

Some analysts are sceptical Shanghai will properly compete with Hong Kong or Singapore while its legal ­system is subject to political intervention and corruption.